Tax reform

A month ago Walgreens, the parent of the many retail outlets across the country with drugs, snacks and household products, announced it was not only completing the purchase of an overseas company but also merging with it. With that, Walgreens’ headquarters would be relocated with the smaller company, outside the United States.

The appeal was the tax savings that would result. Companies headquartered overseas pay a lower tax rate on their U.S. revenues than do U.S. companies and U.S. companies with sales overseas. And, companies overseas can avail themselves of a tax gambit to further lower their tax debt to the U.S. treasury: They can deduct from their tax bill the interest they pay their headquarters on money borrowed from headquarters.

If that sounds like dodging taxes by moving money from one corporate pocket to another, it is.

Walgreens decided not to relocate its headquarters.

Publicly, no one knows whether Walgreens’ leadership really wanted to be headquartered overseas with the adjustment to a different business culture and the relocation costs that would require, but the company’s fiscal responsibility to its shareholders required it to consider it. There would have been considerable tax savings for Walgreens and likely a consistently higher stock price.

A tax environment that encourages U.S. companies to headquarter overseas is not good for the U.S., and that is clear to most Americans.

The lesser part of this members of Congress could easily take care of. An end to the deduction of interest on money borrowed across an ocean but within a corporation is relatively straightforward and could be easily voted on. But, lowering the 35 percent corporate tax rate by about half to more closely equal what is required of companies in other developed countries would be a more difficult political task. Tied to the lower rate would likely be a reduction in the types of tax deductions companies can now take advantage of, and to protect them would wildly energize the many lobbyists in Washington.

When it comes to tax reform, the political parties generally differ in their desired results. Republicans want reform to be revenue neutral – the reforms would not raise any additional federal tax revenue – while Democrats want the opposite, for reforms to generate larger tax receipts. Tax reform for corporations and individuals is long overdue, with every economist saying the country is being restrained economically by tax policies that reward the wrong behavior and hamper growth and innovation. For those of us 2,000 miles from the Beltway, it would seem as though elected officials could meet somewhere in the middle. But, no, that is not the mood in Washington.

An “inversion” is the term Wall Street has given to what Walgreens considered doing in relocating overseas. With a Congress that worked together in the best interests of the country, that term would soon disappear. Unfortunately, we are not optimistic that it will.